of gold reaches record high
By ROB STOCK
GOLDEN RUN: Record high
prices of $NZ1169-$NZ1181 a troy ounce are not
discouraging investors from piling their cash into
Record high prices are not discouraging investors
from piling their cash into gold.
It's often the way when economic apocalypse is on
people's minds traditional investment wisdom says
when central banks print money, buy gold.
At $US920-$US930 ($1169-$1181) a troy ounce, gold is
not cheap. Its staggering price rise from less than
$US300 in December 2001 has been driven largely by
investors speculating that the world would once again
turn to gold as a store of value in the face of
geo-political unrest. Latterly a big factor has been
fear of a rapid deterioration in the United States'
economy, and by dint of that, the world's.
But while gold may not look cheap, at least in US
dollar terms, it's not hard to find those who think
the price can top $US1000. There are even those who
think $US5000 is not impossible, says Mark Sutton,
head of the New Zealand Mint, a private business
which produces bullion coins and bars for New Zealand
investors. Greg Canavan, from share tipster and fund
manager Fat Prophets, has been telling clients here
and in Australia to buy gold for years.
"We have had a very strong gold view. We have been
advising our members to get exposure to gold for a
number of years. Even though the prices have risen,
the fundamental case for gold is very strong,"
Canavan said, although he warned there would be some
ups and downs, which could leave latecomers
disappointed in the short term.
"It comes down to the fact that the US authorities
are looking at pumping another round of economic
stimulus into the economy, lowering interest rates
and creating additional supplies of US dollars, which
we think will eventually lead to a big pickup in
inflation around the world, and gold is a way of
protecting your purchasing power."
In other words, attempts to save the US economy will
end up eroding the value of the assets investors
around the world hold, and gold, of which there is
only a limited amount, is the insurance policy
Does it work as a store of value?
The answer seems to be yes. At the conclusion of the
American War of Independence in the 1780s, one troy
ounce of gold would have paid for a high quality
man's suit. The same is true today. A tougher
question to answer is why. The answer seems to be
that gold is valuable because everybody believes it
is valuable. Economists may deride the fact, but
Sutton calls it a core belief that the world
continues to see gold as the absolute currency.
That's not to say that at all points in time gold
will hold its value. Those who bought gold in 1980
when it was selling at more than $US800 would have
found that 20 years later, it would have been worth
The rationale behind gold's slump then is easy to
fathom. After a big speculative run on gold, based on
fears of economic deterioration, once the world
economy picks up, who would stick their cash into
gold when they can get regular income from investing
in shares or bonds?
It's not just fund managers who have had a penchant
for the glittering stuff. Financial planner and
Sunday Star-Times columnist Peter Hensley began
investing a portion of his clients' growth portfolios
in gold back in late 2001, when he thought global
share markets were hugely overvalued.
Then gold was worth around $US300 a troy ounce.
And he believes that investors have seen nothing yet.
"I believe we are not yet through uncertain times [in
the world economy] and that we are in the early
stages of a bull market in gold. The wider public has
not yet entered the market, and once they do, you
will see greater interest and demand."
That, he says, will drive up prices, although the
issue will be when to liquidate, because history
shows gold has its day, and at times is subject to a
speculative bubble, which he has little doubt will
The rise of exchange traded funds tracking gold will
have a big impact on this, Hensley believes. Not only
does that further weaken gold suppliers' ability to
manipulate price, but takes the future of gold prices
further away from being governed by supply and
demand, and into the hands of investor sentiment.
But Hensley says he plans to tell clients the moment
he decides to sell out of his own positions.
If you are buying gold as a speculative, growth
investment, the real stuff is a bit of a hindrance,
so many argue it's better for the average person to
hold a financial instrument to get their exposure.
Physical gold pays no regular income and it can
actually cost money. Those willing to bury it in the
garden, or hide it in the house, won't have to pay
for a safety deposit box at the bank, although it
will probably see their household insurance premiums
There's also a premium that investors have to pay
dealers like the New Zealand Mint, which charges
roughly 6% on sale and 1% to buy it back. Compared to
a bank deposit today, those holding physical gold
have to see it appreciate by at least 8% plus the
costs of storage and insurance, plus a portion of
those margins, before they would have beaten keeping
their money in the bank.
Hensley uses Perth Mint Quoted Gold Products (QGP),
which are tradable warrants listed on the Australian
stock market, which track the gold price, and are
backed by real deposits of gold, though only cost a
sharebroker's fee to buy, and an annual fee of 0.333%
a year. They are an efficient way to buy gold, says
Hensley, and positions can be liquidated at any time
without the investor having to pay high margins.
The Perth Mint is also underwritten by the state
government, which provides an extra level of
security, says Hensley.
Sargon Elias from broker CMC Markets, who believes
gold will punch through the $US1000 level, says gold
trades top all others on the firm's dealing system as
speculators use contracts for difference (CFDs) to
take a flutter on gold. Most are betting on gold
prices to go higher, which Elias says is down to the
fear factor of recession emerging in the US. "People
are buying it because it is seen as a safe haven," he
says. "When there's a geopolitical crisis, gold goes
Why limit yourself to just one shiny precious metal?
CFD investors can speculate on gold's poorer sister
silver or copper or aluminium, uranium, platinum or
Elias says those trading copper, which is hugely
volatile, would be taking huge risks.
Aluminium is also a difficult bet. As it takes so
much energy to produce, prices tend to be impacted
heavily by the cost of energy, and less speculator
But Elias says silver, though less popular with
traders, does tend to trade in tandem with gold, and
might be worth a bet, but it attracts less of a
fascination for investors.
Canavan agrees, although buying it is harder.
"In the later 1900s, when silver was a substitute for
money, the ratio of its value to gold used to trade
at 16:1. In the last hundred years, silver has been
demonitised, and the ratio is around 50:1. If you
think that silver could once again be considered as a
store of wealth, then that ratio will narrow."
His personal belief: "I think it is undervalued."
Consequently, Fat Prophets recommends the Coeur
D'Alene Mines Corporation, the world's largest silver
producer, listed on the New York Stock Exchange.